BEPS and legislative risk

Inside

“We’re not talking about small changes here. We’re talking about really significant changes to fundamental parts of the international tax architecture. We can’t risk half the countries in the world agreeing with the OECD and the other half not; that would bring bedlam, and we’d spend most of our time stuck between two arguing governments, not running our business.” —Tax Director of a Fortune 500consumer products company

Rising activism, media scrutiny and public interest do not go unnoticed by politicians for long. In February 2013, the OECD released its widely anticipated BEPS report. The report, requested by the G8 and G20, reflected the view of some — but not all — countries that current international tax standards may not have kept pace with changes in global business practices, particularly in the areas of intangible assets and e-commerce.

The report was followed shortly after by the publication of the BEPS Action Plan, which reiterated these themes. It set out that, in the OECD’s view, gaps in the interaction of domestic tax rules of various countries, the application of bilateral tax treaties to multijurisdictional arrangements and the rise of the digital economy have led to weaknesses in the international tax system.

The Action Plan contains 15 Actions, each of which is linked to specific outputs that are to be issued in 2014 and 2015. Many of these Actions are already driving change, and the global business community is taking the BEPS project very seriously.

The OECD’s focus on coordinated action is important because unilateral country action may create double taxation and increase controversy, both of which would be adverse for the global economy. The active involvement of non-OECD members (including Brazil, China and India) in the project is also of high importance.

Uncertainty around BEPS 61% of large companies believe some countries will adopt some OECD recommendations. 30% of large companies think the situation will be characterized by relatively limited coordinated action and more unilateral actions by countries. 4% of large companies believe all BEPS recommendations will be adopted by all OECD countries. Nobody (0%) in the Americas thinks this will happen.

Here too the OECD and business have a common interest in encouraging as many countries as possible to participate in the global dialogue on future international tax standards. It is perhaps no coincidence that our survey respondents identified China, India and Brazil (in that order) as the three emerging markets they felt pose the highest risks. In fact, survey respondents also felt that emerging markets pose more risk today than they did two years ago.

Seventy-eight percent of the largest companies say they agree or strongly agree that entering into or operating in an emerging market significantly increases their levels of tax and controversy risk, up from 67% in 2011. There can be many reasons for this. Because they are dealing with such rapid growth, many emerging markets countries experience very significant policy, legislative and regulatory change as they try to bring their tax regime up to a more sophisticated level.

And even then, the approach to taxing transactions may differ greatly in many areas. Of course, it takes many years for a tax regime unaccustomed to policing cross-border commerce to adapt and mature. Couple this with the fact that many companies will have little or no dedicated resources with strong local tax knowledge or cultural experience and one is left with a highly volatile mix that can flare without warning.

The OECD can play an invaluable role in pressing for common approaches and consistent standards that will provide greater certainty and reduce controversy. In fact, as the OECD itself notes, governments risk “global tax chaos” as they chase dwindling revenues from multinational companies, unless updating the international tax regime is addressed collectively.

The pace of the BEPS project is equally if not more important than its stakeholder composition. Pace is driven largely by the G8 and G20 agenda and by national-level politics. Many businesses feel that the BEPS agenda is overly ambitious and that the timetable (with many key elements to be completed by September 2014 and all actions to be completed by 2015) is too accelerated to allow careful consideration and input. That in turn may drive risk.

This message is intimately understood by the OECD, with Pascal Saint-Amans, who leads the OECD’s tax work, describing the BEPS project as having a “crazy1” two-year deadline that is causing his group to work at a “frantic” pace2.

Uncertainty and concern about the outcomes of the BEPS project pervaded our survey responses. When asked how they thought the BEPS project outcomes might be characterized five years hence, only 4% of large companies believe all BEPS recommendations will be adopted at the national level.

No Americas headquartered companies believe this. Globally, 61% of large companies believe some countries will adopt some OECD recommendations, while 30% of large companies believe the situation will be characterized by relatively limited coordinated action and by increased unilateral actions by countries.

In the BRIC nations, respondents were more skeptical than elsewhere; 43% say they foresee limited coordinated action and more unilateral action. These are not results that support certainty.

Double taxation is one potential outcome of uncoordinated or unilateral actions. When asked to what extent they foresee more double taxation for their company in the coming three years, 61% of the largest companies expressing an opinion agreed or strongly agreed, while only 7% disagreed or strongly disagreed.

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